Canopy Growth Analyst Says Constellation Brands Likely To Bid On Cannabis Company's Equity

Canopy Growth CGC shares jumped Monday when the company announced the appointment of Constellation Brands STZ CFO David Klein as the cannabis company's CEO. 

The Analyst

Cantor Fitzgerald’s Pablo Zuanic reiterated a Neutral rating on Canopy Growth with a CA$18.90 ($14.27) price target. 

Canopy Finally Replaces Linton

Zuanic was surprised it has taken this long for Canopy Growth to hire a new CEO after Bruce Linton's departure, the analyst said in a Monday note. (See his track record here.) 

“Pundits trying to read the tea leaves could make arguments both pro and con regarding whether the probability of a bid by STZ has increased or not,” the analyst said. 

Those chances have increased, he said, explaining there is a more than a two-thirds probability of Constellation Brands putting in a bid for all Canopy Growth’s equity very soon, he said. 

On the other hand, Zuanic said that acquiring Canopy Growth can’t be an easy strategic decision for Constellation Brands given “its own balance sheet, (~4x net debt to EBITDA on FY21 consensus), likely mid- to high-teens EPS dilution from a deal for the 65% of WEED it does not own, and likely near-term hit to its own share price.”

Constellation Brands could advocate for acquisition on the argument of an improving outlook for the cannabis industry, and also if it sees Canopy Growth as a strategic investment and not just a financial one, the analyst said. 

The THC/CBD beverages being created jointly by the two companies could push them ahead of the competition, both in Canada and globally, Zuanic said. 

“We rate the stock Neutral as we are not entirely convinced the premium is justified (taking last qtr sales) and think consensus may be too optimistic for CY20 in relative terms.”

Price Action

Canopy Growth shares were trading 13.48% higher at $21.17 at the time of publication Monday, while Constellation shares were down 1.53% at $180.84. 

Related Links:

Canopy Growth's Cannabis 2.0 Products Will Hit Shelves In Canada Next Month

Canopy Growth Is Prepared For 'Cannabis 2.0' In Canada, Analysts Say

Photo courtesy of Canopy Growth.